Weather Variations and International Trade

Abstract

In this paper I investigate the effect of weather variations in the exporter and importer countries separately, as well as a the difference between weather variations in both countries, on bilateral trade flows. The analysis is done at the country, sectoral and product levels, worldwide, and over the 1992–2014 period. I find a negative effect of temperature variations in the exporter country and in the difference between exporter and importer countries, on bilateral trade, at the country level. At the product level, both negative and positive effects arise, but the negative effect of temperature dominates. The temperature effects are on the agricultural and manufacturing sectors, especially in the textile and metals sectors. I show that possible channels are the impact of temperature on output and labour productivity. The negative impacts are larger in exporter countries that are closer to the Equator, that have lower quality of institutions, and that export to more remote countries. If countries are able to adapt to climate change, the long term effects of temperature variations should be lower than the contemporaneous effect. Nevertheless, my results on the long term effects analysis do not support this hypothesis, suggesting no or very low adaptation. Moreover, the negative effect of temperature is persistent and cumulative through several years after the temperature shock. Concerning precipitation variation effects, they are found mainly at the product level, with the positive effect dominating for the affected products.